Australian Property Market is “Recovering”

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Your usual editor, Dan Denning is on the road up in the big smoke of Sydney. So for today only your guest editor has made the move upstairs at the Old Hat Factory to do some reckoning.

In fact, it’s pretty good timing. In yesterday’s Money Morning we opened a proverbial Pandora’s box of vipers on our readers by bringing up the subject of ‘climate change.’ You can read it online now if you so wish by clicking here.

But for today’s reckoning there’s another subject that we’ve been pumping away at for some time, and which Dan has also challenged head on here.

Of course, I mean housing.

You’d think after nearly two years of credit crunching the bureaucratic boffins would have surprised us all and developed some common sense.

That was probably a little too much to ask for.

So perhaps it isn’t any surprise that according to yesterday’s Washington Post, “US Considers Remaking Mortgage Giants.”

The story states:

“The Obama administration is considering an overhaul of Fannie Mae and Freddie Mac that would strip the mortgage finance giants of hundreds of billions of dollars in trouble loans and create a new structure to support the home-loan market.”

To be honest, it’s almost not worth commenting on. Is it really possible that these supposedly educated public servants and politicians are acting naively? Is it really possible that they haven’t considered the consequences of their actions?

Of course not.

They know exactly what they’re doing. It’s why the term ‘unintended consequences’ has become a misnomer.

It is the consequences that are unintended – they are fully known in advance – it is the timing of the consequences that the pollies are getting wrong.

Their goal isn’t to stop a housing boom followed by a housing bust. Their goal is to try and make sure it doesn’t happen on their watch. The vagaries of the election cycle has given Obama a free kick.

Still only seven months into the job he can easily blame everyone else – Bush, free markets (laugh!) – and claim that everyone else has handled things wrong and that his solution is the only one to ‘cure’ the supposedly broken free-market.

Of course, Obama’s policies are no different to any other meddling politician. There’s no point in just singling out presidents Hoover, FDR, Nixon and Bush Minor, they’ve all had their fingers in the till.

Every president at least since Hoover (and maybe before) has either meddled to help a boom, or meddled to help a bust. Sometimes they’ve done both… simultaneously – ie. Obama.

But if you think you’ve seen the worst of the housing slump. Think again.

According to a report from Reuters, “The percentage of US homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March.”

The statement was based on a report from Deutsche Bank. But get this, “We project the next phase of the housing decline will have a far greater impact on prime borrowers.”

You’ve seen the charts already that show the next wave of adjustable-rate mortgages resetting over the next two years. When that happens in the prime as well as sub prime market, the last twelve months will look like a teddy bears picnic compared to the next slump.

That the Australian housing market is “recovering” is a cause for even more concern.

As we said at the ‘Australia in the Red’ debt summit, “recovering from what?” For something to recover you generally need to show symptoms of sickness. So far all the Australian property market has shown is a couple of spots.

But these ‘spots’ are potentially hiding something much, much worse. The fact that we are reading so many news stories and even emails coming into the Money Morning mailbag telling us that property doubles in value every seven years is concerning.

We’re also told that the Australian property market is different to the US and the UK, and that Australians have a ‘deep desire’ to own their own home.

That these subjective arguments are passed off as fact should be seen as the biggest sign yet that property is about to burst.

It reminds us very clearly of the comments from financial planners and fund managers who used to claim that share prices ‘always go up.’ That argument has looked a little less convincing over the last ten-year bear market.

Just as share prices have stagnated for ten years despite boom and bust periods, why shouldn’t property prices do the same? There is absolutely no logical reason to suggest that property prices always go up. It isn’t possible.

The only reason property prices have been able to sustain the astronomic rise of the last thirty years is down to one reason, and one reason alone…

Government interference. You can argue that slack lending standards and a rising population are all to blame, but they are only as a consequence of government meddling.

The fact is the Australian property market is the most unfree market in Australia. At every step of the property buying/selling process there is interference from either federal, state or local governments.

Each level of interference has a consequence on either supply, demand or price.

It is this distortion that has caused the property market to reach bubble proportions. And it is the continuance of these distortions that will guarantee property price slump in the near future.

Cheers.

Kris Sayce
for The Daily Reckoning Australia

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.
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34 Comments on "Australian Property Market is “Recovering”"

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David V
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http://www.aph.gov.au/SENATE/committee/hsaf_ctte/submissions/sub80.pdf 10 Steps to a Housing Disaster Starting with only 21 million people and a giant island with 100 acres of land per person, how could we engineer some of the least affordable housing on the planet? Here is a recipe to make housing unaffordable: Step 1 – CHOKE NEW CITIES Divide the island into 7 states and create one giant city per state. Force almost all the people into the giant cities with policies such as: * All business zoned in the centre of the city * All government departments must be in the capital city * Non-giant cities… Read more »
Pete
Guest
David V: Question: Could almost the same be argued for California? New Zealand? What about other cities/countries? Japan perhaps? I heard Japan had this amazing boom in the 80’s, and they have even more people with even less space. However…that is not to suggest that your points are invalid. Not at all, they are relevant. I don’t necessarily think that the conclusion is valid, thats all. People can’t buy $500K houses if banks won’t lend that much money. And even if the banks will lend that much, people can’t pay off the loans if the interest rates are too high.… Read more »
Ned S
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Two more for the list:

* Create a society where the only domestic industry is housing and the supply of land to build it on and have governments at all levels tax it to death with fees and charges because there is nothing else to extract tax from.

* Raise a couple of generations of kids who would much rather sit on their bottoms in front of computer screens than get all hot and sweaty outside laying bricks.

Ned S
Guest

Plus tell anyone who should happen to have spare capacity in their main residence that if they rent it out they’ll have to pay capital gains tax on the place when they sell.

Biker Pete, Fredricton, Canada
Guest
Biker Pete, Fredricton, Canada
“…so many…emails coming into the Money Morning mailbag telling us that property doubles in value every seven years is concerning.” Kris Sayce, 7th August ’09. Well, if you’re getting them, you’re certainly not printing them, Kris. Care to give us the references and dates, so we can see just who made these claims… and when? “That these subjective arguments are passed off as fact should be seen as the biggest sign yet that property is about to burst.” Kris Sayce, 7th August ’09. We’ve been reading this from DRA for well over twenty months now, Kris… and yes, I can… Read more »
Ross
Guest
Another for the list, turn up at the Basel negotiations and plug for “safe as houses” capital concessions even though the reason détre for Basel was the Japanese bankers rigged their market so badly that Tokyo land values grew to be equal to a good chunk of the whole of the continental USA. It was the “why beat em if you can ape them” anglo Basel negotiating faction that eventually gave rise to many of those public servants subsequently finding a world of opportunity awaiting them in the banking industry or else in think tanks funded by the banking and… Read more »
Phil
Guest
Japan? (Tokyo anyway) Even after the bubble burst ~20 years ago housing is still expensive, around 400~600k $aud seems the normal price. (for a place between 40m2~100m2). But it is affordable. How is that: – low interest rates: ~1.8% – long terms: 35 years – low deposits/no deposits – population density is still increasing (most of Tokyo is sprawl, not high rise, the new high rise developments are really noticeable) – The buildings are cheap, they build them really quick (homes anyway) Those are the normal terms usually advertised on the “mansion” (big ferro-concrete apartment complex developments) flyers that arrive… Read more »
Vic
Guest

@ Dave

Great submission to the senate. Outstanding work with outstanding clarity of thinking. People of your calibre are rare and a minority.

Will it be heard? No!
Will it result in extra permits being released? No!
Will it amount to anything? Yes – in about 10 years after the GFC has run through Oz.

Biker Pete, Fredricton, Canada
Guest
Biker Pete, Fredricton, Canada

Hmmm… . Being in bilingual New Brunswick, practising my French on an hourly basis where my Franglais and Fringlish don’t cut it, I respectfully point out that you mean “raison d’etre”, Ross! :) So often we repeat what we hear without analysing where it comes from… or what it means… . ;)

Greg Atkinson
Guest

Biker Pete we have also heard from some on DRA other dire predictions such as paper money would be basically worthless, the world was on the edge of a global depression and stocks would never recover :) Doom in downturns grabs peoples attention, stating the bleeding obvious does not :)

And where have those “suckers rally” people gone ;) Yes, it has been a suckers rally alright..up 30%+ since March and still trending up ;)

Vic
Guest
@ Dave I had time to reflect on your paper – 40 pages of good solid analysis. Two additional comments: 1. Perception of shortage is enough to drive the price up. There is some data around to support the hypothesis that the shortage of housing in Australia is partly a figment of imagination, and partly a shortage in the desirable places. Once prices of desirable housing is driven up – it has knock on effect on all housing – estate agents make sure that happens. 2. Despite shortage the prices would not go up if cheap credit was not available.… Read more »
Vic
Guest

@dave

Please examine the role of real estate agents in another piece.

Here is a case of market intermediaries acting as market makers to the detriments of the markets, buyers, sellers and the society. Only people who benefit are themselves.

Key questions:
1. What are the consequences of their actions?
2. How do they effect the markets, buyers, sellers, society and govt.?
3. Which of the current practices are legal yet harmful?
4. Is additional regulation required?
5. This is the key question – How to make sure that they comply with the existing and any new regulations?

Biker Pete, Fredricton, Canada
Guest
Biker Pete, Fredricton, Canada
Yes, it’s difficult to see ‘depression’ anywhere we’ve been so far, Greg… even in Britain, where we suddenly realised why so many Brits are fleeing extraordinary fuel prices, silly taxes, very high rents and crazy house prices… . The auto industry is alive and well across both continents, even if American vehicles are far fewer than during previous visits. Canada seems immune. Tourism is up, planes are packed. Hertz Rental was turning away scores of hopefuls when we went to pick up our car in Halifax. Many hotels have no vacancies… . I share DRA’s view that Americans will be… Read more »
Ross
Guest
Biker, the other day I spelt Veritatis Splendor – Veritas Splendour – it is one of my things and I scratch my head later .. We can disagree about Australian houses but the strawman doesn’t change the inevitability of the change to banking standards that kills off the Basel dwelling capital concession or the extremes of raw leverage for the AU 4 pillar banks by world peer standards. I typed “pier” here least night but I have revised. Greg, you may not recall but I have been fully invested in stocks since mid 08. +50% consumer staples bent toward ag… Read more »
Greg Atkinson
Guest
Ross, I have never moved out of stocks (been in them for around a decade now)and ramped up buying when the market went under 4800 last year. Sure it was not pleasant to see stocks head down to 3000 but I just kept buying small parcels. Buying in bear markets has never been my undoing, it has been failing to see when the market was a little too hot that has caused most of my grief. But I admit I am human and lack the ability to see into the future with any great accuracy, so I simply do not… Read more »
leela
Guest
Good points all by David V. Add one more reason, another piece of sleight of hand by govt: Refuse to calculate the correct rate of inflation, ie. dodgify the CPI. Aust Bureau of Statistics simply achieves an inaccurate stat by not including the land component of housing in the CPI. This has enabled the commercial banks to flood the economy with their ‘debt money’ “at an annual rate of 15% per annum compounding for the last 12 years straight”* without the RBA lifting a finger to counteract this tendency. The last decade RBA calculates CPI rise at about 35%, land… Read more »
Ross
Guest
Sorry greg, I wasn’t questionnning your position. I meant to address your point about the recent market rise and the sky not falling in ie: the DRA market prognosis. I feel that owning part of a company with a solid prospect of maintaining income in the real economy is a better defensive measure than other asset classes and especially compared to cash where the deflation event prompts low interest rate interventions and the inflation event erodes your principal in a blink. The capital appreciation opportunity will come from the need for investment institutions to realign their sectoral allocations. No more… Read more »
Greg Atkinson
Guest
Ross no apology needed..I understood your point. I was just outlining my views which seem pretty similar to yours. I buy into companies rather than trading “stocks” as such. However I was a silly lad and did dip my toe into some REIT’s from around 2006 because I wanted to diversify a little! (ouch!!) I am a little bearish about the Oz economy as things don’t quite add up. The stronger AUD will hurt export earnings and I suspect that at some point China will crank back on their stimulus programme and that would be an interesting development. We will… Read more »
Biker Pete, Fredricton, Canada
Guest
Biker Pete, Fredricton, Canada
Interesting points, Greg / Ross. While I’m bullish about Australian prospects, I have to agree that some things don’t add up, at present. I suspect that Ned’s comments about possible government interventions in November may affect what happens in the three sectors in which I’m heavily invested: property, super and cash. Despite positive Australian media reports I’ve read amping property in the last week or so, our own experience in property can be summed up as: 1.) property is flat at present; 2.) rents have peaked, at least for the time being; 3.) our costs have peaked, for the time… Read more »
Pete
Guest
Greg: I hear you say repeatedly that the depression doesn’t seem like it is here or pretty much anywhere. I think what you need to understand is that these things do not happen overnight. Your seemingly short-term expectations of change appear to reflect the short-termist views that most westernised civilisations have adopted over time…probably due to electoral cycles, the noisy media, technology, and slightly hedonistic approaches to life in general. Share markets are not an economy – although they often act as a forward looking barometer for economic activity. If we start to think that an economy is bullish simply… Read more »
Greg Atkinson
Guest
Pete, In the modern era (say the last 25 years) we have had so many calls about impending doom that it makes my head spin so what time frame roughly are you talking about? Making open ended calls about major market corrections is meaningless because we have been having them for centuries so if you wait long enough, one will come around :) I am not saying DR’s analysis is totally wrong…in fact a lot of it is spot on and that is why I visit the site. But DR suffers from thinking the world is America..it ain’t. The American… Read more »
Gazzbag
Guest

Is this the dr site or the ga (greg atkinson) site. seems like someone has an ego the size of tokyo. if greg is that smart what’s he doing spending all his time on this website. i don’t think i’ve come across a story on this site where he hasn’t had something to say.

Dan
Guest
Greg, the end of the world (which, by definition, is a terminal event) happens to everyone at some point. So doom is a daily event. That’s a point worth thinking about on a daily basis IMHO. As for economic bad news, you’re right. By rights, though, the US should have tumbled economically years ago, but it has managed to lie itself out of trouble many times – the magnitude of the lie is now measured as multiples of GDP. The problem with trusting a system based on lies is that, at some point, people might wake up to those lies… Read more »
rick e
Guest
Hi all I am in Brisbane bulimba and the realestate selling has had its best month June has recorded 6% rise in price in bulimba and surrounding areas. I know been looking since January. Renting on the other hand there is more available since January quite a few of the houses sold are now for rent. I know because if I don’t buy I am looking at future rentals to rent as not happy in unit. So I am following the property market. The aspects for future realerstate in general in oz is? If you are a blue collar worker… Read more »
Biker Pete, Fredricton, Canada
Guest
Biker Pete, Fredricton, Canada
“DR suffers from thinking the world is America.. it ain’t. The American DR authors need to come to grips with the fact that the U.S. is in for a tough time but the planet will keep spinning.” Greg, 08/08/09 That about sums it up. Shaping Bill’s many cogent DR observations about the US scenario to an Australian context has always presented a challenge to DRA. Rick, we’re also hearing reports of significant upward movement in Oz realty, but feel the reality remains a fairly flat scenario, at least in WA. Potential buyers are exercising a wait-and-see strategy, which may be… Read more »
Pete
Guest
Greg: Yes, you are definitely right that doom-sayers will say doom, doom, doom and get ignored until finally one of their guesses becomes a reality – for which they claim credit. That would be like me saying “the market will definitely go down at some point”, which is pretty much a given, but by how much and when? You could say the same for the market going up, etc. And that is why I see less difference between doom-sayers and the optimists who think that “this is just a blip in the market, the trend is always boom, don’t miss… Read more »
Ross
Guest

There is an orchestrated play on this weekend taking down the Yen and Euro against the USD. Lets see what Goldman makes on its book out of this one on their next SEC report. AUD is stable holding up with the USD line.

Greg Atkinson
Guest

Ross my Japanese friends tell me that the Yen is always weak in August due to the Obon break. Have not seen the weakness myself yet but Obon is next week so let’s see what happens.

Ross
Guest

Greg, no need to wait for Goldman’s SEC filing as their spokesman confirm their punt here (if you can call heads we win tails you lose punting) http://www.bloomberg.com/apps/news?pid=20601087&sid=aoCvXKhMdmhM

Biker Pete, Prince Edward Isl., canada
Guest
Biker Pete, Prince Edward Isl., canada
Thanks for that link, Greg. I’ll copy-n-paste it for study…. no mobile printer here. We’re forming some interesting ideas while travelling… mainly related to location/housing shortage issues. With the $200 billion estimated to be flowing from NW gas, I’d say we’re in for more-than-stable property values in WA. :) You may recall I’d posited doomngloom for Quebec and Newfoundland, before we left. May have been wrong on both counts. We saw mild prosperity across the former… and the latter province may be on the edge of its first real boom, thanks to gas deposits. Is BB right that Canada is… Read more »
Greg Atkinson
Guest

Biker Peter the housing market in Japan is a lot different that in western nations and so I think you will have to arrive here with a fresh mind :) Let me know what dates you plan to be around as I might be able to catch up with you for a cold beverage. Are you travelling around Japan or just hitting the big cities/usual tourist spots?

Biker Pete, Charlottetown, PEI
Guest
Biker Pete, Charlottetown, PEI

September to December we’ll continue to cross Canada, Greg. Missus thinks we’ll zap down to Panama and / or Cuba early-mid December, when the freeze hits western Canada; then back to BC for Christmas. Our plans are pretty flexible, but I’m trying to write in a few days’ stopover in Japan around 6th-8th January. No plans to buy property there whatsoever! Would be good to share an ale with you.

Biker Pete, Charlottetown, PEI
Guest
Biker Pete, Charlottetown, PEI
Possibly the best recent article we’ve read on the Australian property market, Greg. If this analysis of RBA policy and Ken Henry’s likely recommendations is correct (and it all makes sense to us… ) property will remain a very sound investment. Our criteria for location have changed markedly in the last five years… well before the demise of outer suburban living in the States.. and for totally different reasons: employment issues, land cost, site preparation cost, building cost, average annual earnings of tenants, rental vacancy percentages, proximity to the sea, proximity to schools and services, etc. Buying fuel here in… Read more »
Bargeass
Guest

Any recovery ie ability to stay overvalued will only be temporary courtesy of Rudd’s desire to get re-elected by diverting taxes to encourage the financially naive underclass to support incumbent property holders. This naive strategy will end in tears which is of course why Ruddd is watering down the Bankruptcy laws.

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